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May 14, 2020

Agricultural Subsidies and Business Loan Programs in the Wake of COVID-19 under the CARES Act and USDA Programs

Nancy B. Bostic and William B. Chaney

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Legislation in the wake of the COVID-19 crisis making billions of dollars in critical relief available to farmers, ranchers, other agricultural enterprises, and small businesses has been signed into law over the last week by the U.S. Department of Agriculture (USDA) and Congress. This article summarizes many of these programs and who is eligible to apply for relief.

New $484 Billion Relief Package

On April 24, 2020, President Trump signed legislation providing $484 billion in aid to small businesses and health service providers (April 24 Legislation). It authorizes $310 billion to replenish the Paycheck Protection Program (PPP), which ran out of the $349 billion in funding initially provided for the PPP under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.This legislation also authorizes $50 billion for additional Economic Injury Disaster Loans (EIDLs) and $10 billion for additional emergency EIDL grants (EIDL Advances). Of significance, this legislation amends the CARES Act to provide that agricultural enterprises with not more than 500 employees are now, for the first time, eligible to apply for both EIDLs and EIDL Advances. The Small Business Administration (SBA) has stated that both the PPP and EIDL programs resumed accepting applications again on April 27 and new EIDL and EIDL Advance applications are being accepted on a limited basis only to provide relief to agricultural businesses.

New $3 Billion USDA Food Purchase and Distribution Program

On April 27, the Agricultural Marketing Service (AMS) announced the availability of $3 billion for the purchase and distribution of fresh produce, dairy, and meat products pursuant to the authority granted by section 1101(g) of the Families First Coronavirus Response Act. Regionally located distributors who are awarded AMS contracts under this program will purchase and deliver these products in boxes to food banks, food pantries, churches, schools, community groups, 501(c)(3) non-profit organizations, and governmental organizations with the capacity to distribute the boxes to Americans who need food due to the COVID-19 crisis. This program is also intended to provide relief to American farmers impacted by the COVID-19 pandemic.

Vendors will be invited to submit responses to an AMS request for proposals (RFP). Details about the RFP process will be communicated through future notices published at http://www.ams.usda.gov/selling-food. Invitations to submit proposals are anticipated to begin within two weeks.

Paycheck Protection Program

PPP loans are available to eligible borrowers to cover certain payroll and other costs described below. The SBA will have no recourse against an individual shareholder, member or partner of a borrower for non-payment of a PPP loan if the loan proceeds are used as directed by the CARES Act. Borrowers are not required to demonstrate inability to obtain credit elsewhere but will need to certify in good faith, taking into account their current business activity and ability to access other sources of liquidity, that current economic uncertainty makes the loan request necessary to support the applicant’s ongoing operations. To the extent not forgiven, loans have a fixed interest rate of 1 percent and a maturity date of two years.

Who is eligible for a PPP loan?

Agricultural producers operating in any one of a variety of business organization types can be eligible to apply for a PPP loan. For example, in addition to small business concerns, from February 15, 2020, to June 30, 2020 (covered period), other business concerns, including agricultural enterprises, are eligible for a PPP loan so long as the applicant employs no more than (i) 500 employees, including full- and part-time employees, whose principal place of residence is in the United States or (ii) if applicable, the larger employee size standard established by the SBA for that industry. The SBA’s affiliation rules apply when determining the number of employees. Individuals who operate under a sole proprietorship and eligible self-employed individuals are also eligible to apply for a PPP loan.

What is the maximum PPP loan amount?

The maximum PPP loan amount for non-seasonal applicants is the lesser of (a) $10 million or (b) the sum of (i) 2.5 multiplied by the borrower’s average total monthly payroll costs in the 1 year period before the date the loan is made or in calendar year 2019 plus (ii) outstanding section 7(b)(2) SBA loans made from January 31, 2020, through the the date that covered loans are made available to be refinanced under the PPP loan. Notably, seasonal employers have an alternate method to determine the PPP loan amount. For seasonal employers, clause (b) above refers to the average total monthly payments for payroll for the twelve-week period beginning February 15, 2019, or at the seasonal employer’s election, March 1, 2019, and ending June 30, 2019.

How can loan proceeds be used?

PPP loan proceeds can be used for payroll costs, which generally includes salary; wages; commissions; family, vacation, parental, medical, or sick leave payments; payments for group health care benefits, including insurance premiums; payment of retirement benefits; and payment of state or local taxes on employee compensation. Loan proceeds can also be used for interest payments on a covered mortgage (excluding prepayment or payment of principal), covered rent and utilities, and interest on other debt incurred prior to the covered period.

What PPP loan amount is subject to forgiveness?

The principal amount of a loan is eligible to be forgiven if spent during the eight-week period beginning on the date of the loan origination at least 75 percent on payroll costs and up to 25 percent on interest payments on covered mortgage obligations (excluding prepayments and payments of principal), covered rent, and utility payments. Loan forgiveness is subject to reduction based upon the borrower’s employee head count compared to earlier periods (taking into account certain rehires) and whether employees earning under $100,000 on an annualized basis prorated for the eight-week period after the loan date are subject to greater than 25 percent salary or wage reductions when compared to the prior calendar quarter. The CARES Act provides that seasonal employers compare employee head count in the eight-week period to the average number of full-time employees per month during the period from February 15, 2019, through June 30, 2019. Notably, the SBA Inspector General on May 8, 2020 issued a report stating that the SBA’s Interim Final Rule requiring at least 75 percent of the loan proceeds to be used for payroll costs in order to have the loan forgiven may leave tens of thousands of borrowers with more operational than employee costs in the position of having to repay the loan.

Is the portion that’s forgiven taxable income?

PPP loans that are forgiven are excluded from the borrower's taxable gross income.

Economic Injury Disaster Loans and EIDL Advances

The April 24 Legislation authorized an additional $50 billion for EIDLs and $10 billion for EIDL Advances. It also amended the CARES Act to allow agricultural enterprises with not more than 500 employees to be eligible to apply for both EIDLs and EIDL Advances.

EIDLs provide working capital loans of up to $2 million to eligible borrowers who suffer substantial economic injury in declared disaster areas. EIDLs carry an annual interest rate of 3.75 percent (2.75 percent for nonprofit organizations) and have terms of up to thirty years. Eligible borrowers from January 31, 2020, to December 31, 2020, include businesses that are able to obtain credit elsewhere. The CARES Act also allows applicants to obtain an EIDL Advance of up to $10,000 on an EIDL application. EIDL Advances are not required to be repaid, even if the EIDL application is denied.

Who is eligible?

EIDLs are already available to qualifying small business concerns, private nonprofit organizations and small agricultural cooperatives. The CARES Act as amended by the April 24 Legislation also allows the following (among others not relevant to this article) to be eligible borrowers: (i) a business with not more than 500 employees, including agricultural enterprises; (ii) individuals who operate their business as a sole proprietor or an independent contractor; and (iii) cooperatives with not more than 500 employees.

Can borrowers apply for a PPP loan and an EIDL?

Borrowers may apply for an EIDL (including an EIDL Advance) as well as a PPP loan so long as the proceeds are not used for duplicative purposes and the other requirements of both programs are satisfied.

CFAP

On April 17, 2020, the U.S. Secretary of Agriculture announced the launch of the Coronavirus Food Assistance Program (CFAP), a USDA program that will provide $19 billion in critical support to farmers, ranchers, and consumers in response to the COVID-19 crisis.

What is the CFAP?

The CFAP has two initiatives:

Direct Support to Farmers and Ranchers. The CFAP will provide $16 billion in direct payments based on actual and expected losses for agricultural producers where prices and market supply chains have been impacted due to COVID-19 (Direct Payment Program); and

USDA Purchase and Distribution. The USDA will partner with regional and local distributors whose workforce has been significantly impacted by the closure of restaurants, hotels, and other food service entities to purchase $3 billion in fresh produce, dairy, and meat that will then be distributed by the distributors and wholesalers to food banks, community and faith-based organizations, and other nonprofits serving Americans who are in need.

Does CFAP provide aid for ethanol and biofuels producers?

The CFAP does not provide relief for producers of biofuels such as ethanol.

When will funding for the Direct Payment Program be available?

The USDA’s April 17, 2020, press release does not specify when direct payments under the Direct Payment Program will be available. Senator John Hoeven’s April 17, 2020, press release states that the USDA anticipates that the application process will start in May and payments will be available by the end of May or early June.

How will the Direct Payment Program work?

As of the date of this article, the USDA has not issued guidance implementing the Direct Payment Program. Senator Hoeven’s press release states that the USDA will provide $16 billion in direct payments to farmers and ranchers as follows: $9.6 billion for the livestock industry, $5.1 billion for cattle, $2.9 billion for dairy, $1.6 billion for hogs, $3.9 billion for row crop producers, $2.1 billion for producers of specialty crops, and $500 million for other crops. The press release indicates that agricultural producers will receive a single payment based on actual and expected losses, capped at $125,000 per qualifying commodity and subject to an overall limit of $250,000 per producer.

Disaster Relief Program

The CARES Act provides for a disaster relief program with a $9.5 billion allocation to the Secretary of Agriculture to support agricultural producers impacted by COVID-19, including producers of specialty crops, producers that supply local food systems, including farmers’ markets, restaurants and schools, and livestock producers, including dairy producers. As of the date of this article, no guidance has been issued to specify how producers can access the aid.

CCC Program

The CARES Act permits the reimbursement of up to $14 billion for the Commodity Credit Corporation (CCC) for certain net realized losses sustained but not previously reimbursed, as reflected in the June 2020 report of its financial condition (CCC Program). The CCC is essentially the financing arm for many farm price and income support commodity programs, commodity export credit guarantees, and agricultural export subsidies. The CCC is authorized to borrow up to $30 billion to carry out its obligations, and net realized losses from its operations are restored annually by congressional appropriations.

On May 5, 2020, the CCC announced the Higher Blends Infrastructure Incentive Program (“HBIIP”) to make available up to $100 million in competitive grants for activities designed to expand the availability and sale of renewable fuels. The HBIIP consists of cost-share grants of up to 50 percent of total eligible project costs up to $5 million will be available to assist transportation fueling and fuel distribution facilities with converting to higher blend friendly status for ethanol (greater than 10 percent ethanol) and biodiesel (greater than 5 percent biodiesel) by sharing costs relating to the installation, retrofitting and/or otherwise upgrading of dispenser/pumps, related equipment and infrastructure. The CCC will finalize the application window for enrollment in this program by future notice in the Federal Register and Grants.gov As of the date of this article, no other guidance has been issued to specify how businesses can access this aid.

Nancy B. Bostic and William B. Chaney

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Nancy B. Bostic and William B. Chaney practice with Gray Reed & McGraw LLP, a Texas law firm with offices in Houston, Dallas, and Waco. Ms. Bostic serves as Gray Reed’s Mergers and Acquisitions and Private Equity Practice Group Leader and as a member of its CARES Act Task Force. Mr. Chaney serves as the Firm’s Agriculture Industry Team Leader and represents agricultural producers and non-producers, including as a member of the court appointed Plaintiffs’ Executive Committee in the In re Genetically Modified Rice Litigation MDL and as Co-Lead and Class Counsel in the In re Syngenta AG MIR162 MDL They may be contacted at nbostic@grayreed.com or wchaney@grayreed.com.